RBA Board Meeting Minutes

In the minutes released yesterday the RBA painted a 'stable' picture of various segments of the Australian economy. It touched on international risks including the USA but since the meeting many worries concerning the USA have dissipated. This is one of the factors that has been holding them back from lifting rates and with Australia heading to above trend growth the question regarding the next hike is now 'When' rather than 'If'. My thinking is still that post the CPI release on Oct 28 is the earliest but there is a slim chance they will preempt that release by raising rates next month.

I've pasted the concluding section below as usual but the key sentence is:

'While policy had to be alert to these risks, members considered that if the central scenario came to pass it was likely that higher interest rates would be required, at some point, to ensure that inflation remained consistent with the medium-term target.'

Considerations for Monetary Policy:

Members noted the increase in concerns over the past month about the outlook for the US economy and government debt in some European countries, which was weighing on market sentiment globally. However, at the same time there had been further evidence that the Australian economy had solid momentum and that firms expected to increase investment significantly over the period ahead. Prospects in the resources sector were especially positive, and the increase in investment in this sector would have significant flow-on effects to the broader economy. Members observed that previous investment booms and increases in the terms of trade had posed significant challenges for economic policy, and that high levels of resource utilisation were likely to put pressure on inflation.

The central scenario remained for the Australian economy to grow at trend pace, or a bit above, over the next few years. This forecast incorporated quite a subdued outlook for the main G7 economies and around trend growth in Asia, with domestic demand in Asia playing a more important role than it had done historically. Members noted the risks to this outlook, including that the recent loss of momentum in the United States could develop into a renewed downturn or that the moderation of growth in China and east Asia could prove to be larger than currently expected. If these risks eventuated, or if there were new financial shocks, another round of extreme risk aversion could result, with adverse implications for the global economy.

While policy had to be alert to these risks, members considered that if the central scenario came to pass it was likely that higher interest rates would be required, at some point, to ensure that inflation remained consistent with the medium-term target. For the immediate decision, there had been no significant change in the overall outlook, with conditions looking a little stronger domestically than they had at the previous meeting, but looking a little weaker internationally. With the economy currently growing at around its trend rate, underlying inflation having moderated and lending rates at around average levels, the Board's assessment was that the current setting of monetary policy remained appropriate for the time being.

The Decision:

The Board decided to leave the cash rate unchanged at 4.5 per cent.